Understanding Adoption Tax Credit
Adopting a child is a beautiful way to build a family. Not only does it bring joy and happiness to the adopting parents, but it also provides a better life for the child. However, the cost of adoption can be daunting for many families, ranging from a few thousand dollars to more than $50,000. The good news is that the federal government provides an Adoption Tax Credit to help with the expenses. This tax credit can provide relief for families and make the adoption process more accessible.
What is the Adoption Tax Credit?
The Adoption Tax Credit is a non-refundable tax credit that helps parents pay for the adoption expenses. It allows adoptive families to claim a credit of up to $14,300 per eligible child for the 2020 tax year. This credit can be used to offset any taxes owed, which reduces the family’s tax liability.
The Adoption Tax Credit can be used to cover several expenses related to adoption, including:
1. Adoption fees
2. Court costs
3. Attorney fees
4. Travel expenses
5. Medical expenses
6. Re-adoption expenses
7. Home study fees
8. Other costs directly related to the adoption
Who is eligible for the Adoption Tax Credit?
To be eligible for the Adoption Tax Credit, the child must be under 18 years of age, or be physically or mentally incapable of self-care. Additionally, the child must be legally adopted, and the adoptive parents must have paid the expenses themselves.
The Adoptive parents must also have a modified adjusted gross income (MAGI) of less than $254,520 for the 2020 tax year. The credit begins to phase-out for families with an MAGI greater than $214,520, and it is phased out completely for families with an MAGI greater than $254,520.
It’s important to note that the credit is per-child, not per-adoption. For example, if a family adopts two children, they can claim up to $14,300 for each child, for a total of $28,600.
How to Claim the Adoption Tax Credit
To claim the Adoption Tax Credit, you must file Form 8839, Qualified Adoption Expenses, with your tax return. This form requires you to provide information about the adoption, such as the child’s name, date of birth, and Social Security number. You must also provide documentation of the expenses paid, such as receipts and invoices.
It’s important to note that the Adoption Tax Credit is non-refundable. This means that if the credit is greater than your tax liability, you cannot receive the excess as a refund. However, any unused credit can be carried forward for up to five years.
Recent Changes to the Adoption Tax Credit
In recent years, the Adoption Tax Credit has gone through several changes. For the 2020 tax year, the credit has increased to $14,300, up from $14,080 for the 2019 tax year. Additionally, families adopting special needs children can claim the full credit, regardless of the expenses paid.
The credit is also subject to annual inflation adjustments. This means that the credit may increase in the future to keep up with inflation.
One of the most significant changes to the Adoption Tax Credit occurred in 2017 with the passage of the Tax Cuts and Jobs Act (TCJA). The TCJA made the Adoption Tax Credit permanent and increased it to $13,750. It also eliminated the ability to claim a credit for employer-provided adoption benefits.
However, the TCJA also repealed the ability to claim a credit for non-special needs domestic adoptions that were finalized after December 31, 2017. This means that families who adopted domestically in 2018 or later cannot claim the Adoption Tax Credit unless the child meets the criteria for a special needs adoption.
Adoption Tax Credit vs. Adoption Assistance Programs
The Adoption Tax Credit is not the only way that adoptive families can receive financial assistance. Many employers offer adoption assistance programs, which provide financial support to employees who adopt. These programs can cover some of the same expenses as the Adoption Tax Credit, such as adoption fees and legal costs.
However, there are some key differences between the Adoption Tax Credit and adoption assistance programs. Adoption assistance programs are funded by employers, and the amount of financial assistance available varies by employer. The Adoption Tax Credit is a federal tax credit, which means that it is available to all eligible adoptive parents.
Additionally, the Adoption Tax Credit is a one-time credit, while adoption assistance programs may provide ongoing financial support. It’s important to research both options and determine which is the best fit for your family’s needs.
Final Thoughts
The Adoption Tax Credit is a valuable resource for adoptive families. It can provide financial relief and make the adoption process more accessible to families who may not have the financial means to adopt otherwise. However, it’s important to understand the eligibility criteria and the expenses that are covered under the credit.
Additionally, it’s essential to research all available financial assistance options, including employer-sponsored adoption assistance programs. By understanding your options and taking advantage of available resources, you can make the adoption process a little easier and ensure a brighter future for your adoptive child.
Among the forms of family tax credit programs which are provided to citizens under United States tax law, individuals who have adopted a child may be able to claim a financial exemption from their obligations to the government. The finding that a newly legally established parent is eligible for an adoption tax credit means that the liability held by that person for paying tax will be considered to have been reduced by the IRS.
The amount of financial relief which can be secured through this kind of family tax credit will at most total $10,960. In administering the family tax credit, the IRS makes such recognition of the fact that the process of adopting a child will often and perhaps unavoidably demand more than a year, but it does not provide for specific claims of adoption tax credit made for individual years in which the overall process of adoption was taking place.
This kind of family tax credit is instead granted by the IRS and administered toward the applicable individual’s taxes in reference to the child adopted, rather than the length of time devoting to securing the adoption.
The adoption tax credit can be applied to both adoptions performed inside of the United States and those which involve children outside of the country, but in differing ways. This family tax credit can be claimed for an adoption intended to take place entirely within the United States even if it does not result in the child being adopted.
If a United States resident adopts a child from outside of the country, however, the adoption tax credit can only be applied for after the adoption itself has been successfully completed. In considering the bounds under which adoption can be considered to have occurred for the purposes of granting a family tax credit, an instance in which the child of a spouse is adopted will not be considered adoption, in that such a procedure only proceeds from the larger context of a new marriage and is not in itself specifically aimed at securing the welfare of a child.
Children whose adoption can be covered under a family tax credit may be found to qualify for their new parent receiving a financial exemption in terms of their age. This qualification can refer to either the actual age of the child, which must be under eighteen years, or the ability of said child to care for him or herself, which if significantly impacted by a physical or mental disability might be legally considered to fall under the age of eighteen.
The costs considered by the adoption tax credit include many of the varied fees which can normally be expected through the involved and complex process of legally adopting a child in the United States. For instance, paying the fees of a legal representatives, paying costs imposed by court procedures, and paying for travel to the current home of the child may all be considered valid expenses to be offset through the granting of an adoption tax credit.
